LONDON: The euro fell on Tuesday as Cyprus's parliament was set to reject a controversial bank deposit levy crucial for the country to secure financial aid but which has raised fears of fresh euro zone instability.
These concerns could prompt long-term investors to sell the euro, traders said. And if the ZEW German investor and analyst survey at 1000 GMT showed sentiment was hit in March due to uncertainty stemming from an inconclusive Italian election, the common currency could quickly drop below $1.29.
The euro was down 0.25 percent from late US levels at $1.2921, but holding above a three-month low of $1.2882 hit on Monday, after a Cyprus government spokesman said a plan to levy taxes on bank deposits was unlikely to be approved by parliament. That would push the island closer to a default and a banking collapse that could have repercussions across the euro zone.
Rejection of the deposit tax plan would inject fresh volatility in to financial markets and weigh on the euro. Safe-haven German bund futures were higher while European stocks fell in opening deals as did bond prices of heavily-indebted countries like Spain and Italy.
"If the vote doesn't go through, it would lead to another precipitous fall in the euro as worries about a banking crisis will escalate," said Adam Myers, European head of FX strategy at Credit Agricole, who expects the euro to drop to $1.27 in coming months.
He said the euro was unlikely to gain much support from the German ZEW survey, given attention was focused on Cyprus.
Against sterling, which is often bought as a shelter in times of heightened uncertainty in the euro zone, the euro wallowed near a five-week low of 85.34 pence hit on Monday to change hands at 85.66 on Tuesday.
"If the plan is voted down, there will surely be fresh selling in the euro," said Tohru Sasaki, the head of Japan rates and FX ressearch at JPMorgan Chase Bank.
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